44 Pages Posted: 21 Sep 2010 Last revised: 18 Mar 2014
Date Written: June 15, 2013
Pending changes in lease accounting standards will require firms to recognize obligations that have historically been kept off-balance-sheet (OBS). We examine the implications of this accounting treatment for a host of common risk and performance metrics. Conventional leverage, Z-Score, levered beta, return on capital and other asset utilization measures underestimate risk and overstate performance of firms relying heavily on OBS leasing. The distortion affects relative rankings as well as average levels and has increased over time. Proposed changes in reporting standards aim to mitigate future distortion, but necessitate adjustments for time-series comparisons. Under current reporting standards, investors, analysts, and researchers can estimate leased asset value and adjust accounting-based metrics to better reflect these fixed costs.
Keywords: Accounting performance, Capital structure, Financial risk, Lease financing, Off-Balance-Sheet, Risk metrics
JEL Classification: G32, M41, M48
Suggested Citation: Suggested Citation
Cornaggia, Kimberly Rodgers and Franzen, Laurel and Simin, Timothy T., Bringing Leased Assets onto the Balance Sheet (June 15, 2013). Journal of Corporate Finance 22, 345-360.. Available at SSRN: https://ssrn.com/abstract=1680077 or http://dx.doi.org/10.2139/ssrn.1680077
By Weili Ge